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(Article from Insurance Law Alert, October 2015)

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Ruling on a matter of first impression under Nevada law, the Nevada Supreme Court ruled that an insurer must provide independent counsel for its insured when an actual conflict exists between the two parties, but that a reservation of rights letter does not create a per se conflict.  State Farm Mutual Auto. Ins. Co. v. Hansen, 2015 WL 5656978 (Nev. Sept. 24, 2015).

Answering questions certified by a federal district court, the Nevada Supreme Court ruled that when an actual conflict of interest exists between an insurer and its policyholder, the insurer must provide independent counsel of the policyholder’s choosing.  The court explained that a conflict of interest exists when the outcome in the underlying litigation will affect the determination of coverage.  The court emphasized that a reservation of rights does not automatically create a conflict of interest.  Rather, a conflict of interest determination must be made on a case-by-case basis, taking into account whether insurer-appointed counsel will have control over an issue in the underlying litigation that will directly affect the coverage analysis.  Notably, there is no conflict “if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”  In adopting California’s Cumis rule, the Nevada Supreme Court rejected the notion (endorsed by a number of jurisdictions) that such conflicts of interest are sufficiently addressed by reference to professional ethics rules, or that divergent interests between an insured and policyholder do not create a conflict of interest because the policyholder is the “sole client” of counsel.  As the court noted, Nevada is a “dual-representation state,” recognizing that insurer-appointed counsel represents both the policyholder and the insurer.